First Republic bailout from banks ‘may not be enough’ to keep it in good standing: Analyst
Raymond James Managing Director of Equity Research David Long joins Yahoo Finance Live to discuss First Republic Bank and UBS buying Credit Suisse, the fallout from the banking crisis and regional bank failures, the Fed meeting this week, and market sentiment.
SEANA SMITH: Let's dig in to the turmoil that is playing out in the banking sector starting with First Republic reports this afternoon that JPMorgan CEO Jamie Dimon leading the talks with other big bank CEOs on a new plan to aid the bank. Shares were off over 40%. We are just off the lows of the day as we kick off the final hour of trading. Now the stock has certainly been on a steady slide ever since a collapse of Silicon Valley Bank.
We want to bring in David Long, Raymond James managing director of equity research. David, it's great to see you. So ahead of this news today, you downgraded First Republic last week. Now there are reports of another effort underway to stabilize the bank. Is it necessary? What your reaction to this report?
DAVID LONG: Sure. Well, if you take a step back and look at the news over the weekend that came with the Swiss banking system with UBS sort of bailing out Credit Suisse, if you will, after a $50 billion injection last week, you look back at-- or you look at the First Republic situation, and they got their own $30 billion infusion last week. And I think what this shows us is that this crisis is not over yet. And we've had Step A by the regulators with the introduction of the bank term funding program. And that was supposed to give the depositors confidence that the banks would backstop deposits that were not insured. Then we had case B, or step B, I should say, with the injection of $30 billion into First Republic.
And here we are today talking about potentially C with First Republic, and that $30 billion in deposits that came from the 11 larger banks may not be enough to keep them in good standing here. So plan C could be some sort of equity injection, and maybe that deposit changes into an equity injection by these 11 banks. So this is being discussed right now, I believe, and we will know more after the close.
DAVE BRIGGS: Are you surprised that the report from the Journal on JP Morgan, they would not send shares back the other way and give the markets, give investors some relief?
DAVID LONG: Yeah, these types of things typically happen when the market is closed. This must have leaked out. I would believe that if JPMorgan is involved and some of the other banks and discussions with First Republic and another type of bailout, if you will, these things typically, you don't want to come out during the trading hours, as you can see, with the stock down about 44% right now. That's something that we'd prefer having discussed in between market hours.
But look, First Republic is in a tough situation. Their debt was downgraded a second time further into junk status on a Sunday afternoon. If you include the heightened funding costs for the bank and match that against their assets, it's not profitable. So they are in a bind. They need some help. And the rest of the banks and I think the regulators do not want to see another failure. So they're doing everything possible to stop that from happening here.
SEANA SMITH: David, there was a group of the mid-sized banks who asked the government to insure all deposits for the next two years, something that might be being discussed right now. Do you think that's necessary in order to avoid a wider bank run in the future?
DAVID LONG: I sure think it could be necessary. We did not get that. That would have been the best case that Sunday night, I believe it was, the 12th, when we were waiting for the Federal Reserve to react to the Silicon Valley Bank news. And it didn't come out then. We did not get the best case. That's something that's-- I think they must still be considering. And like I said, we may see step number C this afternoon. Or before the open tomorrow, there could be a D, and there's probably going to be an E.
There will be other steps taken to stem the tide here, the full deposit insurance. I don't think the regulators would like to go there. They'll get there if they have to, though. It seems like they try to react when they have to. And if they were to preempt that and had announced something over the weekend to insure the deposits, I think that could have spooked the market more than they wanted to before it really needed it.
DAVE BRIGGS: If, in fact, or when First Republic is shored up, do you presume that will stop this game of whac-a-mole and that we will level out in the days ahead? Or will there just be one after the other?
DAVID LONG: Sure. I do think, as I said before, with First Republic, if you just do the math on their income statement and their balance sheet, it's very challenging to find a profit. They're really not profitable with the cost of their borrowing here. When I look at like a PacWest, which I published on this morning-- I do cover that stock-- even with the heightened costs of borrowing right here, they can still make a profit. That's not the case for First Republic. so first Republic seems to be on paper the one that has the greatest risk.
If this whac-a-mole continues, I don't know. It's all about confidence, depositor confidence. And I'm not sure what it's going to take. I've talked with some people that have indicated anecdotally that the amount of deposit insurance doesn't matter. They just want to feel safe with their bank. So even if the Fed were to step up with an increase in the FDIC insurance, I think that is a positive. But I'm not a psychologist, so I'm not sure how everyone's going to act with their own dollars, which they do want to protect as much as possible.
SEANA SMITH: It certainly seems to be a crisis of confidence. I think that is very, very safe to say at this point. David, where does this lead, though-- I guess, how much has the game maybe changed for this group of stocks, for regionals, and are some in the position to capitalize on an event like this?
DAVID LONG: Sure. So we had nine quarters, straight quarters of positive earnings revisions for the banks. In January, with the fourth quarter earnings releases was the first quarter that we had net negative revisions for the banks. And we've been saying for several months that deposit costs are going to rise. Deposit betas could end up higher than expected. And this issue over the last 10 to 12 days has exacerbated that. So banks' net interest margins are going to come down. Estimates are likely to come down pretty substantially for the bank space, as we enter earnings season next month.
As far as who's ready to benefit, I sure think some of the bigger banks are poised to benefit. And I think there are some regionals that can benefit from this. If you want some ideas, I'll say Wells Fargo is one that I'm bullish on. I think they will be a winner out of this. And WinTrust Financial, WTFC, a local bank to me here in Chicago, they've got to set up very well to benefit from this with the way that their deposit system is set up.
DAVE BRIGGS: All right, good stuff. We appreciate that. David Long, thanks so much.